The Housing Chronicles Blog: Homebuilders making it expensive to cancel

Monday, April 21, 2008

Homebuilders making it expensive to cancel

Over the last ten years, most builders were generally fairly lenient with refunding deposits as long as they thought another buyer would soon appear who wouldn't be stuck with any weird design choices or pricey installed upgrades. But as the cancellation rate for new homes has soared to well over 30% -- and even 40% for some builders -- buyers hoping to cancel for any variety of reasons are finding that the fine print they didn't read sometimes also meant they were signing a promissory note for the deposit, making it much harder for them to walk if they think a better deal is on the horizon. From a Washington Post story:

Builders typically ask for 10 percent of the contract price as a deposit, said Harvey S. Jacobs, a Rockville real estate lawyer and owner of Stress-Free Settlements. "If you can get away with paying less, great," he said. "But they ask for 10 percent." Builders also typically ask for additional cash to cover the price of options and upgrades.

In addition to the cash deposit, builders frequently ask buyers to sign a promissory note for an equal amount of money, Jacobs said. That note comes into play only at closing, when it becomes payable out of the buyer's mortgage. It's a liability that lies dormant but that serves to double the amount of cash the buyer has at stake if he pulls out of the deal.

Those promissory notes are builders' attempts to stem that wave of cancellations. If buyers are willing to forfeit $50,000 to walk away from a $500,000 home sale, maybe being on the hook for $100,000 would keep them in the deal. "I'm definitely seeing more letters saying, 'We're going to enforce your promissory note if you don't close,' " Jacobs said.

What's more worrisome, Jacobs said, is that many people don't even realize they have signed such a note, just one page among the many included in a sales contract.

(Ed.) Does NO ONE read documents they're signing anymore? I think this excuse is starting to get a little out of hand. But I digress...

The first opportunity you have to read a builder's sales contract and the accompanying documents (which can be just as important -- and binding -- as the contract itself) could very well be when you are being asked to sign them...

Never sign a contract while you're sitting in the sales office. When you're writing a deposit check for tens of thousands of dollars, and signing a contract worth hundreds of thousands, you really deserve a few days to have the specifics looked at by your own real estate lawyer...

Arthur G. Kahn, a partner with the Brincefield, Hartnett & Kahn law firm in Alexandria, said the procession started in fall 2006.

Sometimes, there are technical aspects to the contract that could become a convincing argument for a refund, he said. For example, he cited a "relatively arcane and complex statute," the Interstate Land Sales Full Disclosure Act. With some exceptions, it requires developers to register subdivisions of 100 lots or more with the Department of Housing and Urban Development. If the development is covered under that law, buyers are supposed to be given a disclosure document, called a "property report," before they sign a purchase contract.

Registration "is a time-consuming process, and you're not allowed to market until HUD has approved the registration of the project," Kahn said. Especially during the real estate boom, he said, some developers didn't want the delay. If the developer should have registered with HUD or should have given the buyer the property report but failed to do so, that could be a route out of the deal and toward a refund...

There are other avenues lawyers might take to recover deposits. For example, contracts often allow builders as long as two years to complete construction. But, especially with condo projects, some deliveries have been closing in on that two-year deadline. No rational buyer wants to pay 2006 prices for a condo now. These deals are ripe for cancellation. Your argument for getting back the deposit may focus on the details about when that two-year clock started ticking, and when the home qualified for an occupancy permit.

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